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Medieval French philosopher Jean Buridan proposed that, when confronted with two equally valid courses of action, choice would be suspended till circumstances change. To ridicule this proposition, the famous example of Buridan’s ass was invented.

The rational ass, finding itself equidistant between two equally succulent stacks of hay, starves to death, for there is no logical reason to prefer one stack over the other. The ass, lost in the complexity of the process of making the right choice, forgets the large picture, namely, that he must eat to live.

Such suicidal neglect of the big picture is the very offence the government is guilty of, while getting righteously outraged over RBI’s temerity in steadfastly ignoring its wink, nod, nudge, hint and detailed demands publicised through the media.

To no one’s creditThe big picture is that an RBI, master of all it surveys in finance, is good for the economy and, therefore, good for the government.

True, the RBI Act does contain a provision that allows the government to instruct RBI to do something that the central bank must then carry out. So, the government is fully within its right to ask RBI to do something it thinks should be done. Being in the right or being right is beside the point; after all, the ass was perfectly right in its assessment that each stack of hay was at the exact same distance from it, but still starved to death.

There is no way in which RBI can be counterposed to the government. It is a relatively small part of the state, with the mandate to maintain financial stability, serve as the government’s bank and contribute to macroeconomic stability, appointed by the executive government. The executive is elected by the people and is the nerve centre of the state. Can RBI say no to the executive?

It can. Just as a junior doctor in one department of a large corporate hospital can say no to its all-powerful CEO, if he were to ask him to diagnose a particular disease in a patient and prescribe a particular course of treatment. Diagnosis and treatment are expert functions that the doctor is qualified to discharge, but the CEO is not. The CEO can certainly refer a patient to the doctor, however.

There are broadly three points of contentions. One is how much of the RBI’s reserves are surplus and can be transferred to the revenue-hungry government. The other is the liquidity crunch non-banking finance companies face, which the government fears could starve small industry of credit, besides the real estate sector.

Arelated problem is the prompt corrective action (PCA) framework for weak banks prescribed by RBI that forces them to halt fresh lending till they are restored to health. As many as 11banks are under PCA, and the government wants them released from it fast, so as to ease up credit.

Of these, the one that should be most malleable is excess reserves. RBI’s most potent asset is its credibility as the lynchpin of the economy’s financial system. That depends not so much on the reserves it holds as on the authority of the central bank and the soundness of the economy and of the financial system it presides over.

By its public browbeating of RBI and appointment of ideologues to the RBI board, the government erodes the authority of the central bank. All the king’s horses and all the king’s ideologues cannot put broken authority together again; however, to the extent reserves signal soundness, an RBI less in command than expected would require more, not less, reserves.

Let regulators regulateRBI should transfer to the government every paisa it can and the government should undertake to funnel every paisa of such transfer to recapitalise the banks.

RBI is the best judge of liquidity requirements and availability, and of restoring banks to health. The government’s concern over NBFCs is misplaced. NBFCs are rightly called shadow banks. Their role is legitimate, and even vital, in some segments of finance. But, in India, they occupy space that banks have ceded, for example, in meeting trade credit for small industry or in financing urbanisation.

Action is needed to restrict shadow banking to its areas of indispensability, by encouraging banks to extend their operations, and to reduce risk in real estate lending by reforming land registration.

Small, ambitious but well-run banks, such as Federal Bank and Bandhan, can be incentivised to work with fintech startups to displace shadow banks in trade credit.

Credible NBFCs should raise equity — these trade at multiples of book value, whereas bank shares struggle to reflect book value — and raise longer-term debt at realistic rates, instead of short-term commercial paper. They face a margin squeeze, not a liquidity crunch.

The government has done signal service to banking health by enacting the Insolvency and Bankruptcy Code. It should now fast-track bank recapitalisation, which would release banks from PCA and free them to start lending again. If, instead of arm-twisting RBI, the government recognises RBI as its own right arm in finance, everyone would feed happily ever after.